Flybe Group Regulatory News (FLYB)

Flybe Group plc

('Flybe' or 'the Group')

Interim Management Statement

Flybe turnaround gains momentum

The Board is pleased to report that third quarter trading for 2013/14 was in line with overall management expectations. Key highlights were that UK scheduled revenue per seat was up 2.3%, whilst costs per seat (excluding fuel and restructuring costs) were down 5.2%. In Finland, revenue from white label flying increased by 23.7%

The turnaround of Flybe, Europe's largest independent regional airline, is now accelerating. Phases 1 and 2 of the Turnaround Plan (announced in January and May 2013), followed by the Immediate Actions (launched by the new management team in November 2013) are all now well advanced. The Immediate Actions were announced with targets to deliver underlying benefits of £7m in 2013/14 and £26m next year, with around 500 proposed redundancies and estimated one off and grounded aircraft costs of £14m this year plus a further £27m in 2014/15. It is now anticipated that job losses will total around 450, and work is continuing to reduce the cost of aircraft grounding.

The Board believes that all these actions are essential to provide the business with a sustainable cost base and a platform upon which it can profitably grow its business in the future, as it implements the twin strategy, announced in November 2013, of being both a UK regional branded airline and a European regional white label provider.

Q3 2013/14 Trading Summary

· 5.0% increase in total revenue under management to £203.5 million.

· Group revenue in line with Q3 2012/13 at £142.9 million.

· UK Airline:

· 0.4% increase in total revenues to £137.6 million despite total seat capacity in UK down 2.3% (scheduled seat capacity down 1.8%).

· 2.3% increase in passenger revenue per seat to £48.46.

· 5.2% decrease in costs per seat (excluding fuel and restructuring costs) to £41.58.

· White label:

· 23.7% increase in white label revenue in Flybe Finland JV to £52.2 million.

Turnaround Update

1. Optimise configuration:

· Flybe's UK route network has now been successfully rationalised for the Summer 2014 season (beginning April 2014), impacting 55 out of last year's 140 summer routes, including the discontinuation of 30 unprofitable routes.

· Flybe's UK base network will reduce from 13 to seven bases by the end of March 2014, as indicated in the November H1 results announcement. The refocus towards the larger bases will result in the closure of bases in Inverness, Aberdeen, Isle of Man, Newcastle, Jersey and Guernsey. Flybe will continue to operate services to and from all of these airports, as part of a total of 119 routes being flown across its UK network in the 2014 Summer Season.

· Surplus aircraft capacity is being addressed by grounding 10 aircraft by the end of March 2014 and a further four by the end of the Summer 2014 season. Work is continuing to reduce the cost of this aircraft grounding.

· In line with its strategy first to optimise and then progressively to grow its route network, Flybe unveiled on 31 January 2014 a major expansion at Birmingham with seven new routes, including Florence, Cologne and Porto, with three more of its Embraer E175 aircraft to be based there. This will result in Birmingham becoming Flybe's biggest base with a total of 12 aircraft flying 32 routes. Birmingham Airport also announced that Flybe will become its largest carrier, flying up to 400,000 extra passengers and nearly 2,000,000 travellers in total to and from the airport.

2. Reduce costs further

· Following the removal by the Group of its divisional structure in November 2013, Flybe has now implemented an integrated organisation structure and completed the streamlining of its senior management team.

· Further progress has been made to complete the delivery by the end of March 2014 of the cost savings previously announced in Phases 1 and 2 of the Turnaround Plan:

· Flybe is on track to achieve the further cost benefits, as previously announced, of £7m in 2013/14 and £26m in 2014/15 from network rationalisation, removal of the divisional structure and engagement with key suppliers. These include around 450 job losses, slightly down from the estimated 500 announced in November. Of these, about half are expected to be voluntary redundancies, others will be leavers and there are anticipated to be around 40-60 compulsory redundancies.

· Flybe is extremely grateful for the positive and constructive way in which the employees, Trades Unions and Employee Representatives have approached the consultation process regarding redundancies as well as the efforts that have gone into mitigating the numbers of job losses. The consultation process is now substantially complete. As a result of contribution enhancing commercial mitigations, which include delay of some aircraft groundings and crew redundancies until after the Summer season, and subject to the final take up of volunteers, only circa 10% of the original planned number of redundancies is now expected to be compulsory.

3. Improve commercialisation:

· Key management roles have been filled with a balance of external recruitment and internal appointments.

· Significant progress has been made with marketing enhancements, in both media and the website. Further work is in hand.

· A structured route profitability and selection methodology has been developed and is being rigorously implemented. Over 100 potential new routes have been assessed and nine new routes have been announced for Summer 2014.

· A variety of pricing, revenue management and route management improvements have been introduced. Early results are showing encouraging trends.

· Trading partnerships with major suppliers are being strengthened and developed further. Flybe is grateful for the cooperative spirit in which partners have entered into discussions, which the Board considers reflects the importance of Flybe to UK regional aviation. Progress so far is underpinned the Board's growing confidence in the achievement of its targeted benefits from the Immediate Actions.

· The Board believes that the impact of improvements is already evidenced in the growth in Q3 of Flybe's share of the UK regional domestic air passenger sector to 49.6%, up 1.2ppts from Q3 2012/13.

4. Finland Optimisation:

· The Flybe Finland JV continues to show strong progress in its profitable white label flying operations. A programme to reduce losses in the legacy scheduled risk flying portion of the Flybe Finland business is being implemented with effect from April 2014, with two of the six loss making lines of scheduled risk flying being removed, and Finnair working closely with Flybe on the commercial management of the remaining routes.

Current trading

UK Airline's current forward passenger sales revenue is as follows:

· Q4 2013/14 shows an increase over last year of circa 3%, driven by an increase in passenger volumes partially offset by lower yields.

· Forward sales for Summer 2014 are currently broadly in line with prior year.

Outlook

The UK economy has returned to growth, although the aviation sector remains highly competitive. The Board believes that Flybe's strong position in the regional aviation market is an attractive and sustainable one that plays an important part in aviation connectivity for regions, airports, passengers and indeed other airlines. In the short-term, Flybe's revenue will be affected as it discontinues unprofitable routes. However, the Group's improved cost structure will, the Board believes, provide Flybe with a firm foundation for future profitable growth.

Saad Hammad, Chief Executive Officer, commented:

"We are on track to deliver £40 million of annual cost savings from Phases 1 and 2 of the Turnaround Plan by 31 March 2014, and significant rapid progress has been made already on the additional Immediate Actions announced in November last year. The transformation of our cost base is being successfully delivered thanks to the hard work and determination of our people and with the support of all stakeholders.

"Taking decisive action gives us a strong platform to implement our strategy, achieve profitable growth and build sustainable value for our shareholders. We are well on our way to becoming Europe's best local airline."

3 February 2014

Enquiries:

Flybe under management KPIs (including Flybe Finland)

UK Airline

UK Airline comprises Flybe's UK domestic and UK to European airline operations.

KPIs

Revenue

Scheduled seats flown in the period were 2.69 million, down 1.8% on Q3 2012/13.

Passenger revenues of £130.3 million were marginally higher than the prior year.

Passenger revenue per seat improved by 2.3% to £48.46:

· Passenger numbers in Q3 2013/14 were 1.90 million, 9.2% higher than the same period in 2012/13, with load factor increasing by 7.1 ppts to 70.8%.

· Passenger yield decreased by 8.1% to £68.42 as a result of the decision to stimulate demand and improve load factor, as outlined above.

Contract flying revenue was £4.0m in relation to four aircraft operating on a Brussels Airlines contract flying agreement. Two of these aircraft are contracted to exit this agreement in April 2014 and the remaining two in October 2014. Revenue from other activities in Q3 2013/14 was in line with the same period last year at £3.3 million.

Costs

UK Airline's costs per operated seat for the quarter to 31 December 2013 (excluding fuel and restructuring costs) decreased by 5.2% to £41.58.

On a constant currency basis, the UK Airline's costs per operated seat for the quarter to 31 December 2013 (excluding fuel and restructuring costs) decreased by 6.0% to £41.58.

Hedging

UK Airline's current hedge books[1] are summarised below (all hedges are forward swaps).

Jet fuel

· Q4 2013/14 - 76% hedged at $990 per tonne

· H1 2014/15 - 76% hedged at $959 per tonne

· H2 2014/15 - 32% hedged at $969 per tonne

US Dollar

· Q4 2013/14 - 73% hedged at $1.54

· H1 2014/15 - 68% hedged at $1.53

· H2 2014/15 - 25% hedged at $1.62

Carbon

· Calendar year 2013 - 89% hedged at €3.73 per tonne

· Calendar year 2014 - 82% hedged at €4.37 per tonne

UK Airline currently has a broadly neutral position in Euro income and expenditure.

Sector share

Flybe's share of the UK regional domestic air passenger sector in the three months to 31 December 2013 was 49.6% (Q3 2012/13: 48.4%).

Total UK domestic sector share of Flybe in the same period was 25.9% (Q3 2012/13: 25.8%).

Flybe Finland

KPIs

The 23.7% increase in revenues from contract flying to £52.2 million has been driven by the commencement on 28 October 2012 of an additional 12 E190 aircraft on contract flying for Finnair.

Fleet

Deliveries

In UK Airline, two new 88-seat Embraer E175 regional jets were delivered in Q3 2013/14 - one financed on operating lease and one debt financed.

Current fleet

As at 31 December 2013, Flybe's aircraft fleet under management is as follows:

Of the total fleet of 98 aircraft, 25 are being deployed on contract flying for Finnair and Brussels Airlines. The average age of the fleet is 5.6 years.

END

Notes:

1. Scheduled seats are the number of seats flown on Flybe scheduled services.

2. Passengers are people with an issued ticket where the ticket has charged a fare and/or a passenger surcharge and tax (if applicable). This includes people who purchase a ticket and do not show up for the flight where, as is usually the case, the ticket is non-refundable.

3. Seats represent the number of seats flown.

4. Load factor is the number of passengers divided by seats flown.

5. Passenger yield represents total ticket and ancillary revenue per passenger.

6. Passenger revenue per seat represents total ticket and ancillary revenue per seat.

Forward-looking statements:

Certain information included in these statements is forward-looking and involves risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements.

Forward-looking statements include, without limitation, projections relating to results of operations and financial conditions and Flybe Group plc ("the Group") plans and objectives for future operations, including, without limitation, discussions of the Group's Business Plan, expected future revenues, financing plans and expected expenditures. All forward-looking statements in this report are based upon information known to the Group on the date of this IMS. The Group undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

It is not reasonably possible to itemise all of the many factors and specific events that could cause the Group's forward-looking statements to be incorrect or that could otherwise have a material adverse effect on the future operations or results of the business. Further information on the primary risks of the business and the risk management process of the Group is given in the Annual Report and Accounts 2012/13; these documents are available on http://www.flybe.com/corporate/investors.